Daily analysis 03.08.2016

The pound is slowly gaining value against the dollar despite weak macro data. Expectations before tomorrow’s BoE meeting. Important US readings. There is a small chance they may push the dollar higher. The EUR/PLN is closer to 4.30 mark and the Swiss franc is slightly below the 4.00 level.

Most important macro data (CET – Central European Time). Estimations of macro data are based on Bloomberg information, unless marked otherwise.

14.15 CET: Change in the ADP private payrolls (survey: +170 k)

16.00: CET: The ISM non-manufacturing data from the US (survey: 55.9 points)

The PMI and the pound

In our afternoon analysis that we published yesterday, we noted that there were some positive factors in the construction PMI index. It was probably also a major reason why the pound gained around 1% do the trade weighted basket of currencies.

Today, however, the final services PMI hit the wire. It was in line with the preliminary reading and dropped to 47.7 level. The details presented by the IHS Markit/CIPS are not really optimistic. The production dropped for the first time in three-and-half years while the pace of contraction was the fastest since 2009.

The 12-month outlook was at its lowest since February of 2009. Regarding the new business subindex, it dropped to the lowest level since 2012 while the pace of contraction was the fastest since 2009.

It is also worth noting that companies stopped increasing employment. It was the first time in 3.5 years when the payroll number was flat. Commenting on the data was Chris Williamson, chief Markit economist, who claimed that the PMI at the current levels may signal the GDP contraction at 0.4% on a quarterly basis.

The real mystery, however, is the question of whether such weak data will continue. Is the economic shock strong enough to cause a recession in the UK? At this point, it seems that the disturbance in the British economy is much milder than those that have been observed in the eurozone in 2012 and the slowdown in the countries exporting raw materials, crude oil and industrial metals. The British economy should also be helped with the fact that there are no signals that the eurozone countries or the United States have suffered in connection with Brexit.

Expectations before the BoE

Virtually all economists surveyed by Bloomberg assume interest rate cuts by 25 basis points. A much stronger divergence is seen regarding the scale of asset purchase program. Out of 44 institutions participating in the survey, 23 claim that the QE will remain at the current level.

Others expect a growth between 50 - 75 billion pounds. It seems that the reduction in interest rates to 0.25% combined with at least 50 billion QE should create significant pressure on the pound. This will also show a strong determination from the BoE to boost the economy. If this scenario is combined by a fairly dovish statement, which suggests that more easing may be on the horizon, the pound may even slump to around 2-3 percent against major currencies.

However, if the BoE only cuts rates, then investors might conclude that Mark Carney and his colleagues, in spite of weak macroeconomic data, do not expect a strong economic slowdown. Even if the decision is combined with a discussion on the increase of QE in the future and some members actually vote for more quantitative loosening, it should push the sterling significantly higher, and the GBP / USD pair would probably exceed the 1.35 level. Considering the latest trading investors rather expect the latter solution.

Important data from the US

This afternoon will be filled with important data from the US economy. Firstly, investors expect to get the ADP report on private payrolls. Secondly, the ISM reading is scheduled to hit the wire. In our opinion, both reports would have to significantly exceed the expectations to push the dollar higher.

The most recent weak GDP readings should push any interest rate hike further into the future, even if the weakness is more of a technical issue than a real economic slowdown. A similar situation was seen when May’s weak payrolls were reported at the beginning of June. So, the market may get even more focused on some weaknesses as the strengths are not expected to change much regarding the dollar.

The zloty gained some more value

Before noon, the domestic currency continued to appreciate. The EUR/PLN dropped from around 4.33 to 4.31. The franc is less than one percent below the 4.00 PLN mark. Currently, the appreciation impulse generated by the FX loan solution should lessen and market participants may assume that the current zloty’s level is close to the medium term balance.

No major impact on the zloty is expected from today’s US readings. On one hand, the GBP/PLN rate and the BoE meeting scheduled on Thursday will be crucial. If the message gets more dovish than expected the pair may drop toward 5.00. On the other hand, if the BoE gets less aggressive the pound may gain value so quickly that the 5.25 level may be tested.

This commentary is not a recommendation within the meaning of Regulation of the Minister of Finance of 19 October 2005. It has been prepared for information purposes only and should not serve as a basis for making any investment decisions. Neither the author nor the publisher can be held liable for investment decisions made on the basis of information contained in this commentary. Copying or duplicating this report without the written permission from Cinkciarz.pl Sp. z o.o is prohibited.

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